DAOs: A Failure in Coordination
Why DAOs are not yet the next step in the evolution of human organizational structures
Decentralized Autonomous Organizations (DAOs) may unlock financialized incentive structures for better value alignment and distributed ownership amongst contributors, but many struggles still exist in coordination.
Primarily these fall under contribution, governance, and culture.
Legal recognition and regulation is another huge barrier, which is beyond the scope of this article. Aashraya Rau and a16zcrypto have done extensive research on the topic.
Contribution
One advantage DAOs have over traditional companies is their flexibility. Rather than the top-down organizational structure where decisions are made at the top levels and passed down, the DAO is a loose, bottom-up structure that is open, transparent and agile.
This attracts top talent as people are intrinsically motivated to unite and contribute to tasks that coincide with their value systems. They are not "employees" or "workers" because they are not usually obligated to fulfill certain contractual obligations. Payment is typically done per task, on a bounty basis, until a longer term commitment is established for a base salary.
In most well established DAOs, if a contributor is unable to complete their task in the time required, someone else will be ready to step in and take the bounty.
Markets may be efficient, but coordination is not. Any organization up against a deadline cannot afford to hand off tasks or onboard new developers in the middle of a cycle.
Hence the paradox of flexible contribution models.
We all seek autonomy in our work because it gives us a sense of purpose, but if we all have autonomy, who is leading the flock?
Further, whereas an employee in a traditional organization has a lot on the line if they don't fulfill their duties, a contributor in a DAO can very readily pick up and move on. A contributor is a contracted assassin while an employee is a royal guard.
Clearly the problem is rooted in reputation and on-chain accountability. Contributors wouldn't be so flaky if they knew their reputation was on the line. The problem is everyone has grown so accustomed to "up only" that we have convinced ourselves that the next big cheque is around the corner.
Now that the sugar high has worn off, we are starting to realize collectively that there needs to be better solutions put in place for coordination. On-chain reputation systems such as proof of personhood, and zero knowledge proofs for soul-bound tokens are some of the emerging technologies to make contribution smoother.
Struggled with DAOs? You’re not the only one
Governance
Governance is a tired old discussion in this space. Countless conversations have been held about how best to distribute decision making fairly amongst token holders.
Evidence is in the polls. Most proposals pass with 95% or higher approval. Voter apathy is worse than modern democracy at 1% turnout. Less than 1% of token holders have 90% of the voting power according to Chainalysis.
Clearly the one token, one vote model is not working. Representation should be balanced between token holders and contributors, workers, and users with less tokens.
There have been several instances of unconventional proposals getting passed, such as when Solend protocol's biggest whale was facing a margin call and the DAO passed a proposal to take over the whale's account and liquidate it through OTC desks rather than dumping $20m SOL onto the open market. Another example is when Avraham Eisenberg exploited Mango for $100m and then passed his own proposal to return the funds if the DAO does not pursue criminal investigations. However, as far as most jurisdictions are concerned, code is not law—he was just arrested in Puerto Rico.
As we sit and bicker over whether governance adheres to our core values of decentralization, we are missing the bigger picture.
Not everyone cares about governance. Not everyone has the capacity for governance. By demanding equal rights, we are essentially thrusting power into the hands of the unwilling. This can lead to tyranny of the majority, or even open the door to governance by those unfit to rule.
Crypto's anti-establishment roots has its core supporters preaching equality for all. While the ability to program incentives offers opportunities for shared abundance, humanity has a long way to go before being able to accept such organizational structures. Certain collectives exist in society that are able to prove shared wealth, but overall humans are accustomed to hierarchy in their lives, especially when in the face of uncertainty. Someone needs to be held responsible in times of crisis.
The second paradox exists in the form of democracy. Too much freedom brings too many problems.
The DAO run lemonade stand illustrates this quite well.
In order to make our shiny new form of democracy work, we need to learn from the history of governance and traditional shareholder voting models. Voters need to be informed, represented, but not overwhelmed.
Apple doesn’t rely on its shareholders to vote on the technical framework for the next generation iPhone. Amazon doesn’t openly solicit shareholder feedback for each step of its fulfillment center growth plans. Instead, shareholders are asked to make a small set of periodic decisions, such as electing a board of directors who are tasked with serving in an oversight role on behalf of shareholders.
Solutions have started to emerge with representative democracy through delegates, contributor driven governance (Optimism’s Citizens’ house), and quadratic voting mechanisms.
Culture
Culture is what makes people stick around. DAOs have an inherent advantage here but there is still a lot of work to be done.
People choose to stay at companies for chiefly extrinsic reasons—they need a salary to pay their bills. If the corporate culture fits their values, bonus. That creates an intrinsic reason to stick around—purpose.
With DAOs, it depends on if they have war chests. In times when capital is flowing freely, there is an abundance of unqualified bounty hunters chasing easy returns
Unfunded DAOs tend to attract contributors for intrinsic reasons—those who believe they are contributing to something that will create positive change. The chance of a 100x return is always present in the back of their minds, but they wouldn't work for a cause that they didn't personally believe had potential.
However, the ambiguous organizational structure of DAOs presents an even larger problem for unifying contributors. We have already established that members gravitate towards causes that coincide with their value systems. What keeps them there?
Even flat organizational structures need leaders with a strong vision to hold the team together. Leaders help shape and disseminate culture to unite people under a common goal in an organization. Obviously, DAOS need a position of authority as well.
Where do we go from here?
DAOs are living in limbo between a decentralized, idyllic resurgence of hippy culture and a centralized, tightly knit process-oriented startup. Programmable incentive structures and on-chain reputation tools provide us with many advantages over traditional organizations. We just need to lose the ideology and build the utility.
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